ICICI Bank Ltd Research Report - 11th May 2016

For 4QFY2016, ICICI Bank’s reported PAT came in sharply lower at Rs702cr.
However, on adjusting for the exceptional contingency provision of Rs3,600cr that
the bank made during the quarter, the PAT is in-line with our estimate.
Domestic advances grew strong, backed by retail loans: During the quarter, the
bank’s advances grew by 12.3% yoy (flat qoq). The sluggish growth was due to a
6% decline in its overseas loan book. Overall, the domestic loan book grew 16.6%
yoy, aided by healthy retail loan book growth of 23.3% yoy. Mortgages and auto
loans continued to drive growth, which were up 24% and 17% yoy respectively.
Retail contribution to total loans increased to 46.6% vs 43.8% in the sequential
previous quarter. The corporate book grew 7.2% yoy. The NII grew by 6.6% yoy, ie
at a rate lower than loan growth, due to interest reversals. Due to high slippages,
the bank took provisions of Rs3,326cr compared to Rs2,844cr in 3QFY2016, up by
17% qoq. Taking asset quality concerns into consideration, the bank took a
contingency provision of Rs3,600cr (it utilised the one-time gain from stake sale in
its insurance arm) and hence the reported PAT came in lower at Rs702cr.
Asset quality deteriorates and could remain under pressure: The bank completed
the AQR process during the quarter and hence slippages stood at Rs7,003cr. It also
implemented SDR worth Rs1,200cr and sees another Rs500cr in the pipeline.
Further, 5:25 done during the quarter stood at Rs680cr and pipeline for the same
stands at Rs750cr. GNPAs went up to 5.82% vs 4.72% in the sequential previous
quarter. The bank has said ~Rs44,000cr worth of loans, primarily from the iron &
steel, mining, power, and cement & rigs sectors are under stress and a large part
of the incremental slippages are likely to come up from the aforementioned
sectors. We expect slippages to remain high in FY2017, with a large part coming
in 1HFY2017 itself and some spill over could be seen in FY2018 as well.
Outlook and valuation: The outlook for ICICI Bank’s earnings remains challenging
over the next two years. However, at the current levels we believe the downside
remains limited. At the current market price, the bank’s core banking business
(after adjusting Rs67/share towards the value of subsidiaries) is trading at 1.0x
FY2018E ABV. The stock has corrected in the last one quarter due to concerns over
deteriorating asset quality. Though pain in asset quality is likely to persist in the
quarters to come, we believe the current valuations adequately factor in the
relatively higher stressed assets in the bank’s books. We recommend an
Accumulate rating on the stock, with a target price of Rs254.